Bombardier money looks more like a bailout than a vote of confidence

It's no surprise that Quebec, Canada's most interventionist province to begin with, considers Bombardier Inc. too big to fail. The transportation giant is such a potent symbol of Quebec Inc.'s global reach and entrepreneurship that saving it elicits unanimity across the political spectrum.

What's shocking is that the provincial government's $1-billion (U.S.) investment in Bombardier's struggling C Series jet program – announced Thursday along with the possibility of plowing yet more taxpayer money into the company's shares – comes with so few strings attached. Quebec's bet that the same folks who created the mess at Bombardier can fix it amounts to operating on a wing and prayer.

"How did it get so bad so fast?" Bank of America Merrill Lynch analyst Ronald Epstein asked Bombardier CEO Alain Bellemare on a conference call Thursday. "How can we be sure this won't happen again when the corporate governance hasn't changed? You still have the same board."

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To be fair, Mr. Bellemare is relatively new to the picture. The Quebec native and former chief of engine-maker Pratt & Whitney's U.S. parent took over from Bombardier scion Pierre Beaudoin early this year to reassure investors that the company was moving to turn around its sliding fortunes. But by then, it was probably too late, at least as long as Mr. Bellemare continued to report to the same bosses.

Mr. Beaudoin stayed on as executive chairman, and he – along with four other family members, including his father Laurent – sit on Bombardier's board. They also control the company through a lock on its multiple-voting shares. That won't change now.The Quebec government is taking a 49.5-per-cent stake in the C Series program, but leaving it to the family to call the shots.

Previous non-family CEOs Bob Brown and Paul Tellier warned the Beaudoins of the perils of taking on Airbus and Boeing, behemoths several times Bombardier's size, in the market for larger jets. But Mr. Brown and Mr. Tellier were long gone – replaced as CEO by Laurent and then Pierre Beaudoin – as Bombardier dove head-first into developing the C Series. It has become an all-consuming venture that has cost close to $6-billion, plagued by delays, operational snafus and anemic orders. It has diverted cash and energy away from Bombardier's other businesses. This crisis is of the Beaudoins' own making.

On Thursday, Bombardier wrote down the value of its investment in the C Series program by $3.2-billion, an acknowledgement that it's unlikely to ever recoup its development costs on future sales of the 110- to 160-seat jet. Bombardier took an additional $1.2-billion writedown Thursday on the cost of developing its Learjet 85 business jet, a proposed plane Bombardier has now cancelled, bringing losses on that venture to $2.6-billion. The accounting moves have left Bombardier with negative shareholders' equity of $3.68-billion.

Technically, taking the C Series writedown now improves the odds that Quebec taxpayers could see a return on their investment one day. But with Bombardier forecasting that it will need to spend an additional $2-billion this year and in 2016 to bring the plane to market, any return to taxpayers remains a distant dream. The company predicts the C Series will turn a profit by 2021, but that is conditional on receiving hundreds of new orders for the plane. So far, it has sold just 243 of them.

Even before Thursday's $1-billion in aid, Canadian, Quebec and British taxpayers had already lent Bombardier more than $800-million to develop the C Series. Bombardier has reportedly approached Ottawa for another $350-million loan, a decision that now falls to the new Liberal administration. A "yes" would bring Ottawa's C Series contribution to $700-million.

Governments have sought to justify plowing taxpayer money into Bombardier for several reasons. The company is an anchor in aerospace clusters in Quebec and Ontario, employing thousands of workers directly and thousands more at suppliers. Bombardier is also Canada's biggest corporate spender on research and development – $2.2-billion in 2013. It employs hundreds of highly skilled engineers who might leave the country if Bombardier went bust.

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There is a fine line between public investment in innovation and corporate welfare, however. Bombardier innovated plenty under Laurent Beaudoin, essentially creating the market for regional jets that it once dominated. But it has lost its way in recent years, and Thursday's investment by Quebec looks more like a bailout than a vote of confidence.

The C Series is widely hailed as quieter and more fuel-efficient than any plane on the market. But execution is as important as innovation. Bombardier embraced a high-risk business strategy, provoking a competitive response from Airbus and Boeing that threatens its very existence. And its development and marketing of the plane have smacked of amateurism.

"The C Series is a good airplane," aerospace analyst Scott Hamilton of Leeham Co. concluded in a report this month. "But management made just about every bad decision possible, leading to the position the company is in today."

Someone should have to bear the consequences of that failure. The Quebec government apparently does not think it's the Beaudoins.

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